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Benefit corporations: Social enterprise finds a better vehicle

September 17, 2014

​​​​​​​​​​​​​​Some US for-profits can pursue a social mission. In Australia, it's not so simple

Along with the growth of corporate philanthropy in Australia there’s a new interest in social enterprises – organisations that use the power of the market to affect positive social and environmental change. 

“Yes, we're seeing a rise in social enterprise,” says Sarah Adams, a researcher and PhD candidate at the Centre for Social Impact​ at UNSW Business School. 

“But it's still not as big a sector as we're seeing overseas, and there are a number of reasons for that. One issue is that Australia doesn't really have a legal form that is a suitable model for a social enterprise.”
​Enter the benefit corporation – a recently minted legal entity in the US. Benefit corporations are for-profit firms that also pursue a social mission and are able to consider the interests of non-financial stakeholders as well as the financial interests of shareholders.
The concept emerged in 2005 when the founders of a publicly listed sportswear business, which had championed socially responsible practices and given 10% of its profits to local charities, decided to sell the company. Under pressure from private equity partners, the company had to unwind all of its social commitments to fulfil its legal obligation under corporate law to maximise shareholder value.

And so the movement began. Since 2010, more than 25 states in the US, including California, New York and Delaware, have passed special legislation to recognise benefit corporations and there are presently about 1000 in operation. 

Brand recognition

​Benefit corporations accept an obligation to report on their overall social and environmental performance using a credible and transparent third-party standard. This generally takes the form of gaining certification from B Lab, a related but independent non-profit organisation that has an online assessment process using criteria such as governance, staff opportunities, environmental responsibility and community engagement. 

B Lab certification – which enables a business to call itself a B Corp – is voluntary and is often compared to a Fair Trade rating, or being recognised as a provider of organic produce. It offers a brand differentiation and signals membership to an ecosystem of like-minded businesses.

“And it’s a great benchmarking tool,” says Alicia Darvall, executive director of the Melbourne-based Australian and New Zealand chapter of B Lab. According to Darvall, Australia now has “nearly 40 certified B Corps” and she describes the nascent sector as “all about impact investing”.

First cab off the rank was private investment firm Small Giants. Others to follow include publicly listed financial services company Australian Ethical, TOM Organic tampons, The Hub Australia, and TuShare, a free-cycling website that recently “signed a $700,000 partnership with NRMA to provide a private sharing network for its members”. 

Darvall says that future B Lab certification in Australia will require “businesses to change their articles of association to reflect their commitment to their stakeholders”. 

“But at the moment we don't quite know whether or not [existing] Australian legislation will allow us to ask businesses to do that.”

'B Corps look at how they can adjust the existing legal form to accommodate a social mission rather than doing something completely based in the not-for profit sector' ​

Australian B Corps have no special legal status and simply operate as for-profit firms that aim to do good things, a prerogative of any company. As for the primacy of shareholder interests – that which Darvall describes as the “pointy end of the business” – Australia’s Corporations Act does offer some provision for considering wider stakeholder interests but the issue has not been tested. 

With this in mind, B Lab hosted a “brains trust” in Melbourne last month where 25 academics and lawyers were invited to consider whether there is a need to lobby for special benefit corporation legislation in Australia.

Says Adams: “I don't think there's an enormous appetite on behalf of the government to pursue this at this stage.”  She notes that the previous Labor government had a Senate inquiry to look at ways to provide capital for social purpose but that it came to little “and  unfortunately the issue is pretty much off the agenda now”.

Social outcomes

Australia differs from other jurisdictions in that it has around 600,000 not-for-profits that are well established in delivering social outcomes, many contracted to provide government services. 

“If you want to operate a social enterprise in Australia, you either need to take a for-profit legal form, for which you can't get deductible gift recipient status, and you can't get tax benefits. Or you can take a not-for-profit legal form, which can restrict the types of investment you can obtain and limits equity disbursements,” Adams says. 

“So you'll see a lot of Australian social enterprises take both – they'll be a for-profit company with a not-for-profit wing, or a not-for-profit with for-profit business units. STREAT in Melbourne is an example of the latter. STREAT is a social enterprise that looks at getting homeless kids off the street by training them in hospitality. It is run as a not-for-profit and has a range of [for-profit] cafes. 

“Unfortunately, such complex structures are not necessarily the most efficient or effective model for social enterprises, which are often start-ups with limited resources.”

And Adams notes that there are already “a few legal forms that we have in Australia that can offer a social and financial mission, including co-operatives, mutuals or indigenous corporations, which often get left out of this debate”.

But the emergence of B Corps in Australia is an encouraging development in the social impact space.

“What they do really well is show people who are in the traditional corporate mindset that there are alternatives out there that aren't radically different from what they are used to,” Adams says. 

“The B Corp model is built from a corporate legal form, its heart and its soul is in there. It looks at how they can adjust the existing legal form to accommodate a social mission rather than doing something completely based in the not-for profit sector. Raising awareness in the for-profit community is one of the benefits of the B Corp model.”

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